Medicare Finances Worsen, Social Security Will Tap Reserves for First Time in 36 Years

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Medicare’s financial problems worsened last year while Social Security still faces a significant long-term financial crunch — and will need to tap into its reserves for the first time in 36 years, according to annual reports released Tuesday by the programs’ trustees.

Here are the details you need to know about the outlook for safety net programs that more than 60 million American rely on — and that together account for about 40 percent of federal spending:

Social Security encompasses two programs, one for retirees and one that provides disability benefits. Taken together, the trust funds for the two programs are projected to be depleted in 2034, the same as last year. Taken separately, the fund for retirees is now expected to be depleted in 2034, a year earlier than last year’s report, while the disability insurance reserves run out in 2032, four years later than projected last year.

For the first time since 1982, Social Security’s cost is projected to exceed its total income this year, forcing the program to tap into its $2.9 trillion trust fund to cover benefit payments.

Depletion of the Social Security trust funds means that the program would no longer be able to pay its full benefits. Continuing payroll tax revenues to the combined trust funds would be sufficient to cover 79 percent of scheduled benefits starting in 2034.

To make Social Security fully solvent for 75 years, the report says, revenues would have to be increased by an amount equivalent to a permanent payroll tax rate hike of 2.78 percentage points, from 12.4 percent to 15.18 percent, or scheduled benefits would need to be cut by as much as 21 percent, depending on whether the reduction in payments was applied to all beneficiaries or only those who become eligible starting this year. Some combination of revenue increases and benefit changes could also eliminate the projected shortfall.

Medicare’s Hospital Insurance Trust Fund, which is known as Medicare Part A and covers inpatient care for older Americans, will be depleted in 2026, three years earlier than projected last year. The deteriorating outlook is the result of lower-than-expected wages in 2017, and thus lower payroll tax collections. Last year’s Republican tax cuts also reduced projected revenue from taxes on Social Security benefits. The program’s spending, meanwhile, was slightly higher than expected.

Total Medicare expenditures were $710 billion last year. The trustees project that Medicare costs will grow from about 3.7 percent of GDP in 2017 to 5.8 percent by 2038, and will continue to rise to about 6.2 percent of GDP by 2092.

The trustees said the share of Medicare hospital benefits that can be covered by the program’s payroll tax revenues will decline from 91 percent in 2026 to 78 percent in 2039 before rising to 85 percent in 2092.

President Trump has said he won’t cut Social Security or Medicare, and his administration says that a strong economy will bolster both programs. “The Administration’s economic agenda — tax cuts, regulatory reform, and improved trade agreements — will generate the long-term growth needed to help secure these programs and lead them to a more stable path,” Treasury Secretary Steven Mnuchin said in a statement Tuesday. But as Robert Pear of The New York Times notes, based on the new trustees’ reports, “so far that does not appeared to have happened.”

As editor in chief, Yuval Rosenberg oversees all aspects of The Fiscal Times' website and email newsletter. His writing has appeared in publications including BusinessWeek, CNBC.com, CNNMoney.com, Fast Company, Fortune, Newsweek, Money and Time.